Pros and Cons of a 403(b) Rollover Into an Roth IRA

A 403(b) rollover into a Roth IRA account has advantages, especially when you have accumulated funds in your employer-sponsored retirement plan. However, there are disadvantages, depending on when and if you make the conversion.

The 403(b) plan allows employees in government, schools, churches and non-profit organizations to contribute up to $18,000 a year to their retirement account.

Most workers can't contribute the maximum, but many employers boost the savings through matching contributions. Workers aged 50 and older can add $6,000 in catch-up contributions, according to IRS regulations.

Roth IRA maximum contributions are $5,500 and $6,500 if you are age 50 and older. There are no contribution limits to rollovers.

Under the 403(b) plan, the money put in to your account grows tax-free. Taxation begins as you withdraw money after age 59 and a half for retirement. The contributions in a Roth IRA account are taxed, but you receive the money free of income tax when you take it out at any age.

Gains, dividends and interest aren't taxable while in the plan. A Roth IRA conversion is a consideration for many people approaching retirement age when they have built up their retirement savings through the 403(b) plan.

The amount of a conversion from a 403(b) to a Roth IRA is taxable, however. You are taxed at the marginal rate during the year of the rollover. This could cause higher tax rates if the accumulated amount of your 403(b) account has moved you into a higher tax bracket.

The timing of the rollover could have consequences if you are younger than age 59 and a half. You would receive a 10 percent tax penalty for early withdrawal. When you withdraw the 403(b) funds for a rollover after 59 and a half, you aren't penalized and pay the tax on the conversion amount, according to TIAA-CREF Financial Services.

You would have to weigh the benefits of switching to a Roth IRA for more diversity in investments if you haven’t reached the required age for withdrawal.

A 403(b) rollover into a Roth IRA account has advantages, especially when you have accumulated funds in your employer-sponsored retirement plan. However, there are disadvantages, depending on when and if you make the conversion.

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